I speak with new business owners on a regular basis who are looking to obtain a loan for their business needs. A common misconception is, since they have a legal business, they don’t have to use their personal credit to obtain financing. Unfortunately, this is not the case. Building business credit is done the same way personal credit is built- over time and by establishing relationships with financial institutions.
I’ll never forget when I had to finance my first car. I was 20 years old, and had virtually no credit history except for an Express store credit card with a $80 credit limit. Now, I walk into a dealership and expect a lender to give me upwards of $10,000 with no history on whether I pay my bills on a loan of this size. Unfortunately for me, my parents were never in the business of co-signing, so it was up to me to get my own loan with my own credit. To this day, I have no idea what the interest rate was, but let’s just say my monthly payment could have afforded me a luxury car rather than the tin can on wheels that I purchased that day. I was just grateful to get a loan because I needed the car.
Cue a few years down the road. I graduated college and was getting started on my career path. I had pretty a pretty good credit history by then, and decided I was going to buy myself a new car. The difference is, this time I did buy a luxury car (albeit the most basic model they had) and the loan process was SO much easier compared to the first time. AND my monthly payment was lower than my tin can on wheels.
The same holds true for building business credit . If you have started a new business and will need to finance something in the future, I do hope you take the steps to build your business credit the same way you built your personal credit. Note- for the first two or three years you will need your personal credit to back all of your business loans. I can’t think of any exceptions unless you have another company to cosign for your with their business credit. Here are some steps you can take in order to build your business credit, so down the road, it can stand on its own without your personal credit and make the financing process quick and smooth.
- Incorporate your business
- Obtain a federal tax identification number
- Set up a business address and phone number
- Open a business checking account with your business legal name
- Obtain a business credit card (may need to be a secured card to start with)
- Obtain an account with Dunn & Bradstreet
- Set up business accounts with Experian and Equifax
- Apply for financing for your business using your personal credit (Note* these tradelines will only show up on your personal credit if you default)
- Pay your bills on time!!
For the same reason as my auto loan story above, as a new business, expect to pay higher rates in the beginning. The higher rates may be a bit painful at first, but do know that they will get better with time. Another thing to keep in mind is that business financing has its share of tax write offs, so try not to focus so much on the rate.
If you are a startup business and want to discuss your financing options, drop me a line here.